I recently received an e-mail from a 64-year-old widow named Linda who is reasonably well off but wants to avoid taking a lot of risk with her money.

She has two Guaranteed Investment Certificates maturing this month, worth a total of $150,000. She says they generate about $450 a month in income for her.

“I am trying to decide whether to renew the GICs or put the $150,000 in mutual funds,” she wrote. “I am talking with my bank adviser who thinks I should switch to mutual funds, but I am scared to put everything in one basket. Do you have any suggestions?”

It’s not surprising that the adviser would recommend mutual funds over GICs. He gets more commission that way. But in this case it may be the right call, although it does mean accepting more risk.

I hadn’t checked current GIC rates for some time so I did some surfing. Five-year rates for non-redeemable certificates at the major banks currently range between 1.75 per cent and 2 per cent (Scotiabank had a special offer of 2.3 per cent at the time of my research but it was not clear now long that would be available.)

With the exception of the Scotiabank special, those rates are lower than they were in April when they averaged 2.2 per cent according to the Bank of Canada. That’s a surprise – at the start of the year, it was generally assumed that interest rates would gradually rise through 2014. Instead, they’ve been in retreat in recent months.

We’re not at record lows – the average five-year rate at the start of the year was only 1.63 per cent. But with inflation running at 2.4 per cent (the June CPI number) GICs aren’t even keeping up with increases in the cost of living. The economic parlance, they have a negative real return.

That’s unlikely to change any time soon. Even with inflation running ahead of its 2 per cent target, the Bank of Canada is not expected to raise its overnight rate until at least mid-2015 because that would put upward pressure on the loonie, derailing the hope of an export-led recovery. The U.S. Federal Reserve Board is also in a holding pattern.

So what should people like Linda do? Rolling over the GICs for another five years is not a great idea at this point. Sometime between now and 2019, rates are certain to rise, barring a major depression.

One possibility is to invest in one or more balanced funds that pay monthly distributions. There are several that currently have yields in the 4 per cent range, which would translate into income of $500 a month, a little more than she’s receiving now. However, balanced funds, by definition, have a stock component so she’d have to accept a higher level of risk.

Another option is to open a brokerage account and invest in a portfolio of preferred shares. There are several quality issues that yield between 4.5 and 5.5 per cent and the payments are eligible for the dividend tax credit. Preferred shares are safer than common stocks, but they are vulnerable to loss when interest rates rise sharply, as happened in the spring of 2013.

If these options are too risky for Linda’s taste, then my advice is to put the money into a high interest savings account. It won’t pay as much as the GIC but the principal will be safe and can be reinvested when conditions improve.

According to highinterestsavings.ca, rates of between 1.3 per cent and 1.95 per cent are available from smaller financial institutions. However, you can sometimes find special promotions at the big banks. For example, CIBC is currently offering 2 per cent until Sept. 30 on new deposits to an eAdvantage Savings Account when the balance is $5,000 or more.

That’s still not keeping up with inflation, but it’s better than locking up your cash for five years at today’s rates.

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